South Korea a Case Study in Long-term Market Development

The newly approved South Korea-U.S. free trade agreement (FTA) is just months from implementation, and the opportunity to build upon already expanding U.S. dairy exports to Korea has never been greater. Reflecting the growing interest in the market, a recent U.S. Dairy Export Council (USDEC) trade mission to Korea drew unprecedented industry participation from both countries. Similarly, a reverse mission of Korean bakers to the U.S. also garnered strong interest from the trade.

"Today, Korea is one of the fastest-growing destinations for U.S. dairy products and the United States is one of the leading suppliers to the market. But this success didn’t happen overnight," says Les Hardesty, a dairy producer from Greeley, Colo., chairman of USDEC and a board member of Dairy Management Inc., which is the primary funder of the Export Council. "The story of how this East Asian nation grew from a small buyer to a major customer is a classic case study in long-term, integrated market development programs executed collaboratively with processors to ensure dairymen have markets for our growing U.S. milk supply."

2011: Sales nearly double

In the first nine months of this year, U.S. export shipments to South Korea were valued at $174 million, up 85% from the previous year. Cheese sales more than doubled, to 28,511 tons (62.9 million pounds), and butter and lactose sales also were up significantly. The U.S. became Korea’s No. 1 cheese supplier, with a share of 45%, and remained its top seller of whey proteins and lactose.

Overall sales are on pace to approach $240 million this year. In September, a few weeks before the Korea-U.S. FTA would be passed in Congress, nearly three dozen representatives from 16 U.S. companies visited South Korea as part of the largest-ever USDEC trade mission. Suppliers took part in market briefings, plant and store visits and one-on-one meetings with key buyers. Participants reported significant business from the trip: With 75% of the 16 supplier surveys returned, the event generated 7,000 tons (15.4 million pounds) of new business worth an estimated $31.5 million over the next 12 months.

Laying the groundwork

A decade ago, Koreans consumed dairy the way Americans consume Korea’s national dish, kimchi—very rarely. Moreover, U.S. suppliers had little distribution, and awareness of the U.S. as a dairy supplier was almost nonexistent.

Shortly after U.S. dairy producers founded the organization in 1995, USDEC established an office in Seoul. At the time, exports to Korea averaged just $30 million a year. Since then, USDEC has conducted a wide range of programs incorporating market research, product promotions, market access assistance and trade policy advocacy.

"When we first entered the Korean market, our biggest obstacle wasn’t just competition from other suppliers, it was also the historic lack of dairy in the diet," says Tom Suber, president of USDEC. "So we had to build the program in Korea from the ground up. We began with basic education programs—a television cooking show, simple public relations, applications seminars and trade shows.

"The key was to build distribution and develop strategic partnerships. We also had to get U.S. suppliers interested in the opportunity by providing market research and on-the-ground intelligence, which was much less accessible in the pre-Google business world than it is today."

Early programs

Starting with the bakery sector and focusing on cream cheese in the early part of the decade, USDEC and its members teamed with the Korea Bakery Association to conduct recipe contests and technical seminars that fostered interest in U.S. cheese. At the same time, the organization set about overturning misconceptions about whey proteins, a strategic U.S. export category.

"When USDEC got into the market, the Korean trade thought of whey only as a feed ingredient," says Matt McKnight, USDEC’s senior vice president of market access and regulatory affairs. "It had a negative image -– it was something you fed to swine, not to people."

In fact, whey wasn’t even permitted as an ingredient in certain foods. For instance, Korea’s standards for ice cream and yogurt allowed only skim milk powder to be used as a source of additional milk solids. USDEC staff petitioned the Korean government, enlisted Korean manufacturers for support and met with regulatory agency officials to broaden the standard. As a result, the Korean food code was rewritten to allow the use of whey, and local manufacturers soon reformulated their products.

Marketing programs evolve

In 2003, USDEC and member companies built on their earlier work, expanding promotional efforts into the retail sector. In-store sampling introduced U.S. cheese to many Korean consumers for the first time. As Korea’s food landscape became more Westernized, USDEC programming extended to the burgeoning pizza sector.

Trade seminars and menu development consultations focused on helping operators get the best performance from their cheese and on tailoring pizza to local tastes. This was accompanied by a 2004 reverse mission that brought pizza chain leaders to the U.S. to visit cheese plants, meet with manufacturers and get a better appreciation for U.S. supply capabilities.

U.S. cheese exports to Korea increased 56% in 2008, confirming the growing penetration by U.S. suppliers. For the first time, Korea passed Japan as America’s No. 2 cheese export market.

That year, the nation’s top four pizza chains began sourcing cheese from the U.S., and trade servicing and educational programs promoted the use of whey in both food and feed applications.

Perhaps the most significant achievement to date came with the introduction of U.S. string cheese in Korean convenience stores. The initial success of the launch led to pickup by other stores, and the product quickly became the second-best selling dairy product throughout the c-store channel. The introduction of U.S. string cheese was a collaborative process based on a long-term relationship between the U.S. supplier and the Korean distributor, who was already working with the company on single-serve U.S. cream cheese.

FTA should spur continued growth

"The growth of the Korean market is the culmination of more than a decade of USDEC activities and with the newly passed free trade pact, prospects for continued growth look bright," Suber says.

Supported through dues from its member companies and organizations, USDEC trade policy staff played a key role in the FTA negotiations by successfully pressing U.S. negotiators to expand access to the protected Korean market. Given the historical sensitivity in Korea’s agricultural sector, negotiations were particularly challenging. However, the U.S. dairy industry won unprecedented duty-free access for whey for feed use as well as for 16,000 tons (35.3 million pounds) of cheese, milk powders, whey for food use and other products. The agreement also called for most of Korea’s remaining tariffs to be phased out over five to 10 years.

"This is the essence of what USDEC was created for," Suber says. "Sixteen years ago, U.S. dairy leaders—both producers and processors—recognized the need for an integrated, long-term market development effort that could help facilitate sales for a growing U.S. milk supply. With its primary funding from the dairy farmer checkoff program, the United States has since moved billions of pounds of milk into Korea, made possible by a series of programs that, over time, complemented each other and helped U.S. suppliers get into the market and stay in the market."

Adds Hardesty: "USDEC facilitation of sales of U.S. dairy products overseas has reaped benefits for dairy producers, and South Korea is a case study underscoring why we need these demand-building programs and how to pursue them."

The U.S. Dairy Export Council (USDEC) is a nonprofit, independent membership organization that represents the global trade interests of U.S. dairy producers, proprietary processors and cooperatives, ingredient suppliers and export traders. Funded primarily by the dairy checkoff program through Dairy Management Inc., USDEC aims to enhance U.S. global competitiveness and assist the U.S. industry to increase its global dairy ingredient sales and exports of U.S. dairy products. USDEC accomplishes this through programs in market development that build global demand for U.S. dairy products, resolve market access barriers and advance industry trade policy goals. USDEC is supported by staff across the United States and overseas in Mexico, South America, Asia, Middle East and Europe.